Today I'm writing from Washington DC where I'm attending meetings of the G20 Finance Ministers, IMF and World Bank. These come at a critical time given the recent weakening in global economic activity and increased volatility on financial markets. As the IMF noted during the week, the international economy has entered a dangerous new phase. Engagement through the G20, IMF and other multilateral organisations is now as important as ever. Major economies need to deal with the current challenges with the same determination that saw us stare down the global financial crisis. This involves working together to foster stronger global growth and financial stability. But there is only so much we can do collectively. Many developed economies need to take swift action to get their finances in order. Some have failed to pursue the necessary reforms over a long period, allowing their budget positions to gradually deteriorate and become unsustainable. By contrast, Australia faces the current bout of global instability from a position of strength, with very low debt, low unemployment, a strong banking system, a massive investment pipeline and a plan to bring the budget back to surplus in 2012-13, although obviously current global events makes that task much tougher. Our successful response to the GFC and record of economic reform means our fundamentals today are rock solid. My meetings in Washington have confirmed why now is not the time for the Government to back away from its reform agenda. We must continue with the necessary reforms and put in place the right policy settings so we can keep our economy strong into the future.
The global recovery from the GFC was never going to be easy, and three years on we're still feeling the aftershocks. While the Australian economy has grown over 5 per cent since the crisis struck, many of our peers still haven't made up the ground they lost. Both the United States and Europe have been unable to establish enough economic momentum to bring down their stubbornly high rates of unemployment. Many advanced economies are also struggling under the weight of excessive sovereign debt. As the IMF said in its Global Financial Stability Review during the week, the crisis has now entered a new ‘political phase' with markets calling for swift action by policymakers, including credible plans to pay down sovereign debt levels and get their finances on a sustainable medium-term footing. Where possible, this fiscal consolidation has to be achieved without jeopardising the economic recovery. Clearly that's a difficult balancing act and will require some tough decisions. But ultimately confidence won't be restored until these economies adopt credible fiscal plans. Of course, major developing countries also need to do their bit to address global imbalances. This includes putting in place policies to foster domestic demand and moving towards market-based exchange rates. These were all points the Prime Minister made along with the leaders of five other economies in a joint letter to French President Nicolas Sarkozy, who holds the rotating G20 presidency, ahead of the Cannes G20 Leaders' Summit in November.
The extent of these global challenges was made clear by the IMF's World Economic Outlook during the week, which revised down its global growth forecasts to 4 per cent in 2011 and 2012. While that sort of growth looks respectable enough, it masks the widening split between East and West. Developing Asian economies are growing at more than four times the rate of advanced economies. Our region's two emerging giants, China and India, are forecast to grow by 9.5 per cent and 7.8 per cent respectively in 2011, and 9.0 per cent and 7.5 per cent in 2012. Fortunately, Australia is in the right part of the world at the right time. More than 70 per cent of our goods and services exports go to Asia. In fact, our exports to China and India alone are double those to the US and Europe.
Even though we are likely to see bouts of instability continue for some time to come, we need to remember that our situation couldn't be more different to many of our peers. The IMF forecasts the Australian economy will grow 3.3 per cent next year, faster than any major advanced economy in the world. And on Friday, Standard & Poor's reaffirmed Australia's top-tier AAA credit rating, citing our fiscal strength, strong balance sheet and public policy stability. Our strong public finances are one of Australia's great economic strengths. Our debt is a fraction of the level of other advanced economies and recent events overseas have proved why this is so important. During the week, we saw an important development in strengthening Australia's already strong budget framework with the passage of a bill through the House to set up an independent Parliamentary Budget Office. The PBO will ensure that the Australian community is better informed about the fiscal impacts of policy proposals, particularly during election periods. I urge all Members and Senators to support this important institution that will increase the accountability and transparency of our democracy.
It is because of our strong foundations that we are so well placed to tackle the reforms that will set Australia up for generations to come. Whether it be building the superfast National Broadband Network, creating a clean energy future by pricing carbon pollution, or spreading the windfalls of the mining boom to every corner of the country, these are reforms all made possible because they are built on a platform of fundamental economic strength. It is the responsibility of all governments to be forward looking, making sure that they do the hard yards of reform for the future. It was this reformist zeal that we saw through the 1980s and early 1990s, and I assure you that's what motivates this Government every single day as we put in place the big reforms we need for future prosperity.
A big part of this reform agenda is reforming the tax system to help businesses deal with the patchwork pressures of a changing economy. One important way we're doing this, as well as increasing productivity and growth across the entire economy, is through tax reform to encourage investment. New investment is a way struggling businesses can pay for a new lease on life. It not only provides new tools and equipment, it also supports new ideas. That's why this Government is introducing from July 1 next year an instant write-off of any asset worth up to $6,500 and the first $5,000 for cars, vans and utes for small businesses. We've also introduced a new research and development rebate that directs more support to genuine R&D, including a 45 per cent offset payable in cash for small and medium businesses. Businesses with annual turnovers of less than $20 million will benefit most, as they will receive the highest rate of assistance and – importantly for many cash-strapped small businesses – eventually they'll be able to claim their R&D tax refund credit within months of doing the work. And we are cutting the company tax rate to help businesses across the economy.
Next month's Tax Forum is an important opportunity to talk about further ways the tax system can work better for businesses, particularly those outside the mining boom fast lane. As I told Parliament last week, one issue that people are talking about in the lead-up to the forum is the tax treatment of losses. A loss is simply an expense that a business could claim if it were profitable. The tax system can sometimes discourage sensible risk-taking because investors sometimes don't receive full value for their tax deductions. It may also discriminate against smaller businesses that are unable to utilise tax deductions immediately because they don't have the diversified revenue sources of larger companies.
The Government has already taken steps on losses. For example in the Budget we announced that the value of the initial tax losses incurred by investments in infrastructure projects of national significance will be uplifted to maintain their real value. In a similar vein, allowing business to claim a deduction for their equity finance would reduce the tax rate on less profitable businesses, and would make the tax treatment of debt and equity financing more similar. The Australia's Future Tax System Review said this was worthy of further investigation and the recent review of the UK tax system by James Mirrlees also supported this concept. Obviously, any proposed change needs to be funded. The problems we're seeing in some advanced economies at the moment are a timely reminder of the need to maintain our fiscal discipline. We can't talk tax cuts without also talking about harder things like loopholes and unnecessary tax expenditures. And I've made it very clear that sending households the bill for business tax cuts by increasing the rate or base of the GST is not the answer.
Later today at a ceremony in Washington, I'll be accepting the Euromoney Finance Minister of the Year award. I certainly appreciate all the kind words and well wishes, but this really is an award for the hard work of all Australians who pulled together during the GFC. The recognition serves as a great reminder of what our nation has achieved together over the past few years and gives us confidence to meet these challenges in the years ahead.
Deputy Prime Minister and Treasurer of Australia
Sunday 25 September 2011